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Time to take charge

Battery farming: SQM’s lithium mine in the Atacama Desert of Chile which Sichuan-based Tianqi has bid for

First discovered in ore at a Swedish iron mine in 1817, lithium was initially recommended as a remedy for gout and it had another unsuccessful stint as treatment for high blood pressure. From the 1950s it was more widely prescribed as a mood stabiliser for people suffering from manias.

In the industrial context it was deployed mostly as an ingredient in glassmaking and ceramics, although by far the major use of the world’s lightest metal today is for lithium-ion batteries, which have an energy density that packs a lot of power into a very small space.

Amounts vary by application: between 50 and 60 kilogrammes is needed for the batteries that power electric cars, but just a couple of grammes to keep your smartphone going.

The expectation is that the brave new world of electric vehicles (EVs) is going to spur greater demand and further drive up prices of lithium, which have doubled over the past two years.

And as with other hot commodities, the excitement has also been triggering investment in mines by Chinese producers, as well as anxiety in other countries that too much of the industry might fall under Chinese influence.

What’s triggered the recent buzz in the sector?

The biggest deals on the table include a $4.1 billion bid last month for a 24% stake in SQM, Chile’s largest lithium miner, by Tianqi Lithium from Sichuan.

Tianqi already operates two of the world’s largest lithium production plants in China and is building another in Australia. It is also the controlling shareholder of Talison Lithium, owner of the world’s largest lithium mine, Greenbushes in Western Australia.

Ganfeng Lithium, the second of China’s leading lithium processors, has been busy as well, buying into Toronto-listed Lithium Americas last year and taking stakes in a number of lithium projects in Australia. Last month it was reported to be a prime contender in the race to acquire up to 49% of the Wodgina lithium mine, also in Western Australia, from Mineral Resources, which has already partnered with Ganfeng to develop the Mount Marion project.

Both Tianqi and Ganfeng are set for listings in Hong Kong later this year, strengthening the sense that they are putting together a war chest for further activity, topped up by loans from Chinese banks.

They have been joined by many of the world’s car firms in the scramble for lithium supply. Late last year Chinese manufacturer Great Wall Motors took a stake in Pilbara Minerals, another Australian lithium miner. A trading arm of Toyota, announced in January that it was buying 15% of Orocobre, a lithium producer in Argentina. The following month BMW was reported to be in talks for long-term supply contracts in lithium and cobalt, and Tesla signed a deal in May with Kidman Resources, another Australian miner, to purchase lithium from its planned refinery.

Is China really taking charge?

Tianqi’s bid for a much larger chunk of Chile’s SQM would give it a say over the distribution of as much as half of the world’s lithium output, through the combination of its stakes in the Greenbushes mine in Australia, and SQM’s operations in the Atacama Desert.

That has left Chilean policymakers unsure about accepting the deal and has prompted requests for the country’s anti-trust regulators to review it. This, in turn, prompted complaints from China’s ambassador to the South American nation, who warned against “negative influences on the development of economic and commercial relations between both countries”. He also refuted claims that the Chinese government was involved in the negotiations as part of a strategy to concentrate control of the world’s lithium’s resources. (Tianqi is considered a private sector firm, formed in 2004 after the privatisation of a lossmaking state-owned lithium plant for Rmb10 million. It is now worth Rmb55 billion, or $8.58 billion.)

The Chilean concerns are more understandable because ownership of lithium production is already pretty concentrated at the corporate level. North Carolina-based Albemarle is the market leader, with an 18% share, says Bloomberg, followed by Ganfeng Lithium on 17%; SQM from Chile on 14%; and Tianqi Lithium on 12%.

As Bloomberg points out, the main players are also intertwined in co-developing their main resources: the Greenbushes mine is a joint venture between Albemarle and Tianqi, for instance.

Chinese firms have been looking to take stakes in newer miners for lower-cost production in Latin America too, Henk van Alphen of Chilean lithium developer Wealth Minerals told Reuters earlier this year. In doing so they are running into Panasonic and Samsung, which have focused more on signing long-term supply contracts with the local producers. Samsung has agreed to build battery materials plants in exchange for commitments on supply, and Tianqi’s offer for shares in SQM will be “nerve-wracking for Korean and Japanese companies,” van Alphen said.

Similar anxiety about dwindling access to strategic commodities has gripped the Trump administration in Washington, which has released a list of 25 minerals “considered to be critical to the economic and national security of the US”.

The report points out that the Americans are already reliant on others for many of their key mineral needs, and the only active lithium mine on American soil is the Silver Peak mine in Nevada, which produces a relatively small amount of concentrate every year.

The report warned that dependence is greatest on the Chinese, who are supplying the Americans with at least 20 of the critical minerals.

That presents a very different situation to the semiconductor sector, where the American stranglehold on higher-end chipmaking has just forced ZTE, one of China’s best-known telecom manufacturers, into commercial deep-freeze. It also gives rise to debates as to whether the Chinese could ‘weaponise’ their control of some of these key resources, lithium included.

Who produces the world’s lithium?

Lithium concentrate (commonly described as lithium carbonate equivalent) is produced in two main ways: through evaporation from saline brine and by crushing hard rock ore. Most of the hard ore extraction is done in Australia, but the majority of brine production comes from salt lakes in the Chilean and Argentine Andes. The Latin American resources tend to be lower-cost, although they take longer to produce. The bulk of new resources are expected to be hard rock, however, probably from Australia.

China is home to both types of lithium deposits and it actually accounts for the world’s second largest lithium reserves. The problem is that Chinese brine deposits are lower quality than Latin American ones, and much of the hard-rock resource is found at high altitudes in places like Qinghai and Tibet, which makes it more expensive to extract.

That means that it is cheaper to import lithium from overseas, although state firms have been encouraged to do more at home too, including the state-backed giant China Minmetals, which announced last year that it had developed its first batch of lithium carbonate from a salt lake in Qinghai province.

Chinese miners contributed just 6% of global production last year, trailing the Australians, Chileans and Argentinians by some distance in output terms.

In the meantime the miners have been looking for a wider range of sources for lithium, just as Beijing has tried over the longer term to diversify the country’s imports of oil. Analysts predict more investment in countries such as Zimbabwe, Brazil and Bolivia and less reliance on producers like Chile and Australia.

But whether this kind of campaign might ever amount to an effort to corner the market is debatable. Coordinating a national strategy like this is challenging – something that Beijing learned from its losing battle to lower the costs of iron ore imports (see WiC59). The situation was similar when it tried to curtail the sale of rare earths to Japan during a diplomatic row (see WiC81). Producers exploited loopholes in the rules to keep up sales to Japanese customers but another by-product was that investors began to put money into alternative production in countries like Canada, South Africa, Malaysia and Kazakhstan.

This simply reiterated what the industry already knew – that rare earths aren’t actually very rare. Even now about 90% of global supply comes from China, but that’s largely because other countries haven’t wanted to shoulder the costs or environmental risks of producing the rare earths themselves.

Is lithium a good long-term bet?

Investors thought so for much of the last two years as prices rose strongly. Confidence then took a hit at the start of this year after new concerns about oversupply. The change in mood was triggered by a deal between SQM and the Chilean government allowing for a substantial increase in output, which prompted a bearish forecast from an American investment bank that lithium prices would peak at $13,000 a tonne this year before declining by almost half by 2021.

The lithium bulls have responded furiously to the forecasts, arguing that junior explorers are underestimating the costs and complexities of getting new mines into production, especially for hard rock projects.

They also counter that the bears are underestimating future demand and that prices for copper, nickel, cobalt and lithium are all going to soar because of the millions of new battery packs needed to power the next generation of electric cars.

Much depends on your standpoint on how rapidly electric vehicles are going to replace gasoline-powered cars. Lithium’s fans expect an accelerated transition, citing a slew of announcements from car manufacturers. Volkswagen says it will produce at least two million EVs a year by 2025; Ford is promising $11 billion in investment in 13 new electrified models over the next five years; and Volvo says that all the cars that it makes from 2019 onwards will have electric motors.

The bullish analysts are hopeful of a much fuller transition by the mid-to-late 2020s when electric vehicles could be cheaper to buy than cars with combustion engines. And of course, the key marketplace is in China, where sales of one million EVs are expected this year, which would be halfway towards the government’s target of two million sales by 2020.

“China will continue to be the pivotal factor that drives the fast popularisation of electric vehicles globally,’” Nannan Kou from Bloomberg New Energy Finance forecast in May.

So who are the likely winners?

Producer nations are betting on the EV sector hitting its sales targets and accordingly putting sustained pressure on the new supply.

Take Tesla, which is planning to make a million electric vehicles a year by 2020 (despite its current challenges in meeting production quotas). At least 45,000 tonnes of lithium carbonate equivalent will be needed to meet Tesla’s annual forecast alone (total output of the carbonate last year was 240,000 tonnes).

The Association of Mining and Exploration Companies – an Australian lobby group – is upbeat. It thinks that miners in Western Australia will make $10 billion over the next eight years from lithium sales. Indeed the same association is arguing that returns for the resource-rich region of Australia could be 30 times greater still if policymakers push for the state to become a minerals hub that combines mining with cathode production and other battery technologies.

In reality, the Chinese are much more likely than the Western Australians to put such a coordinated grand plan into practice.

In fact, a broader assessment of the industry’s prospects should focus on the pressure points across the supply chain for the end-product: batteries. While much of the media attention has been focused on the contracts between the lithium miners and the car firms, these kinds of deals are yet to have much effect on market prices, says Benchmark Minerals.

More important in the medium term are the plants that convert the concentrate into market-suitable cathodes for battery makers. “The key question is over the expansions of the conversion facilities. Of course, the premier convertors are Ganfeng Lithium and Sichuan Tianqi and both are planning significant expansions domestically and abroad,” it says.

That puts the two firms centre-stage in shaping the sector’s fortunes. One consequence: investors have driven up the value of Tianqi’s Shenzhen-listed stock more than five times in as many years.

Another company with a prominent role is CATL, which claims to have moved past Panasonic to become the world’s largest supplier of EV batteries by sales. Nissan, Honda and Daimler have already put in orders for the company’s batteries, joining Volkswagen and BMW as customers, and the Ningde-based manufacturer is another of the Chinese firms set for an IPO this year (see WiC404). It says it will use some of the proceeds to build a new factory in its home base in Fujian and it is also believed to be exploring sites in Germany, Hungary and Poland for its first overseas plant.

Further investments like these will see Chinese players taking positions from mining through lithium processing into cathode production and battery making – plus, of course, in the production of the electric vehicles themselves.

Of course, critics of companies like CATL say that they wouldn’t be nearly as competitive without state sponsorship and that too many of China’s lithium firms are benefiting from the soft loans and subsidies that are fuelling the current trade row with Washington. Yet Beijing looks unlikely to bend in its pursuit of Chinese leadership in battery technology and EVs. For one thing, the sector is a priority in its plan to upgrade the country’s manufacturing base. And for another, the crippling of ZTE shows the dangers of relying too much on others in the supply chain.

That said, not all is going quite to plan, if the capital markets are anything to go by. On Monday CATL announced that it was settling on a much lower valuation for its Shenzhen listing, for instance. Last year it was hoping to be valued at $20 billion, but due to its rapid expansion and consequent declines in profit margins, CATL has admitted it will now settle for $8.5 billion.

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